India to grow at 7.7% in FY07: BankAm

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Booming manufacturing and services sector is likely to push up India's GDP growth to 7.7 per cent in 2006-07, but inflationary pressure may lead to hike in interest rates, Bank of America said on Thursday.

However, Bank of America warned that cutting fiscal deficit as per FRBM (Fiscal Responsibility and Budget Management) Act is likely to remain a challenge in the absence of further budgetary reforms.

"In India, GDP growth is likely to remain in high gear at 7.7 per cent in 2006-67, as economic activity continues to transit from the public to private sector," Bank of America chief economist Mickey Levy said in the report 'Global Outlook for 2006'.

Growth is likely to be more evenly distributed among varying sectors, with the manufacturing and services sectors maintaining forward momentum and agriculture benefiting from a normal rainfall.

Rising income levels will see inflationary pressure mounting in addition to the effect of the gradual pass-through of higher fuel prices in 2005.

"Wholesale Price Inflation is projected to average higher at 5.1 per cent in 2006-07 compared to 4.6 per cent in 2005-06 in part due to a low base this year," Levy's said.

Policy rates (repo and reverse repo) will remain on an uptrend because managing the build-up of inflationary expectation continues to be an over-riding concern for Reserve Bank of India.

Though privatisation of state-owned companies in a smaller scale will relieve fiscal pressure in the near term, achieving commitments under the Fiscal Responsibility Act will be difficult in the next fiscal in the absence of further budgetary reform.

The current account deficit of the country may pose a challenge in 2006-07, the report said.

The strong investment cycle, low real interest rates and the credit boom will continue to exert significant upward pressure on the trade imbalance.

"Import growth will outpace export growth, although we see the current account deficit staying at a manageable 2.5 per cent of GDP, up from around two per cent in 2005," Levy said.

The present shift away from state domination is likely to continue to proceed with a further ease in the regulatory environment, which will keep India at the forefront of destinations for foreign direct investment.

The steady stream of FDI projects and incremental investment liberalisation is likely to trigger a significant improvement in long-term investment flows in 2006.

There is likely to be improvement in long-term capital inflows, together with an expected stable flow of overseas borrowing and equity inflows, and the overall balance should remain in surplus with rising foreign reserves.